Energy XXI bid higher in gray market; Flagstar's $270 million preferreds quiet on debut

By Rebecca Melvin

New York, Oct. 28 - Energy XXI (Bermuda) Ltd., which was expected to price $200 million of convertible perpetual preferred stock Thursday after the market close, was bid at around 260 in the gray market during the session, which was 10 points above its 250 face, and the equivalent of about a 104 bid on a bond, a New York-based sellside trader said.

The planned deal "looks good," said an East Coast-based buysider,

In addition, Energy XXI's existing 7.25% perpetual convertible preferred, which is subject to an exchange offer, is likely to get exchanged given that the issuer's offer was "fair," the buysider said.

Flagstar Bancorp Inc.'s $270 million of convertible preferred stock, which priced ahead of the market open, wasn't heard trading in the secondary market; although one source said it was up to 24 from its 20 par, despite a devastating slide in the underlying common stock related to a concurrent stock offering that came at a steep discount.

The Flagstar preferreds automatically convert to common stock in 60 days, subject to shareholder approval.

Also in the primary market, Green Plains Renewable Energy Inc. was quiet during the session. But a syndicate source said it was pricing successfully after the market close, with an upsize to $75 million and a $15 million greenshoe, from an initially talked $60 million with a $10 million shoe.

Final terms were not immediately available, the syndicate source said.

Otherwise, the convertible market was pretty quiet and pricing was steady for the most part.

There was some action in United States Steel Corp. and Vertex Pharmaceuticals Inc., a New York-based sellside analyst said. And Eastman Kodak Co.'s convertibles were higher outright as shares surged on positive earnings.

Elsewhere, Cameron International Corp.'s 2.5% convertibles due 2026 changed hands at 131.5 versus a share price of $44.60; and Chesapeake Energy Corp.'s 2.75% contingent convertibles due 2035 traded at 96 versus a share price of $21.35.

Energy XXI 'looks good'

Energy XXI's planned $200 million of convertible perpetual preferred stock was looking "cheap," and higher in the gray market at 257.5 and 258 and 260 on Thursday, according to different sources.

One New York-based buysider said he heard 259 to 263 in the gray market at around 2 p.m. ET, which is the equivalent of 103.6% to 105.2%.

The deal was appealing for its good cash flow and good carry, according to one hedged buysider. But another source said the minus 1 borrow on the common was the only detraction.

Another possible negative is that the paper, which has three years of call protection, is a perpetual preferred.

But it did look cheap at the midpoint of talk, which was for a dividend of 5.625% to 6.125% and a 17.5% to 22.5% initial conversion premium.

Energy XXI shares fell as much as 11% Thursday but pared losses to settle lower only by 8%, or $1.88, to $21.55 in heavier-than-average volume.

The Bermuda-based Energy XXI launched an exchange tender on its existing 7.25% convertibles last week, when it released quarterly earnings.

Holders who tender by Nov. 4 will receive 8.77192 shares of common stock and $19.00 in cash for each convertible. Holders who tender after the early tender date but before Nov. 18 will receive 8.77192 shares of common stock and $18.50 in cash for each convertible.

The exchange offer is not conditioned on any minimum number of convertibles being tendered.

Energy XXI's current product capacity exceeds 28,000 barrels a day, although not all of that will flow on an average day, the company said last week during its earnings call.

Flagstar prices preferreds

Flagstar's mandatorily convertible preferred stock will be automatically converted in 60 days, subject to a shareholder vote, a syndicate source said. There was no dividend set at pricing.

The Troy, Mich.-based savings and loan holding company also priced 110 million shares of common stock at $1.00 per share. The new share price represented a 57% discount to Wednesday's closing share price on the New York Stock Exchange.

J.P. Morgan Securities LLC was the bookrunner for the registered, off-the-shelf offerings.

The paper was not seen heard in the Street on Thursday after pricing, with several sources saying it was a quasi private deal.

"Toxic waste" was how one New York-based sellsider described the Flagstar preferred. It was "pre-placed with equity holders, something about the coupon still needs to be approved by the board; and most accounts didn't get a look," the New York-based sellsider said.

Green Plains upsizes

Green Plains was considered a small deal by market players, many of whom said they didn't look at it due to its size. The $60 million issue was upsized however to $75 million, which is still considered a small deal.

The Omaha-based ethanol producer was selling five-year convertible senior notes under Rule 144A via bookrunners Jefferies & Co. and Credit Suisse Securities.

The new paper was talked at a coupon of 5.25% to 5.75% with an initial conversion premium of 22.5% to 27.5%.

Kodak higher outright

Kodak's 7% convertibles due 2017 traded at 94.75 versus a share price of $4.30, a New York-based sellside desk analyst said. The paper was previously seen around 90 to 91.

Shares of the Rochester, N.Y.-based photography company closed higher by 61 cents, or 15%, to $4.58 in heavy trade on Thursday.

The company posted a narrower third-quarter loss of $43 million, or 16 cents per share, compared with a loss of $111 million, or 41 cents a share, in the same period of 2009.

Revenue was lower by 1% at $1.76 billion.

The photography company benefited from a $210 million gain from a licensing agreement with a competitor; but its film and photofinishing business slid, with earnings from operations at $20 million down from $47 million.

Kodak reaffirmed its 2010 target of $350 million to $450 million in operating earnings on sales ranging from $7.5 billion to $7.7 billion

Mentioned in this article:

Cameron International Corp. NYSE: CAM

Chesapeake Energy Corp. NYSE: CHK

Eastman Kodak Co. NYSE: EK

Energy XXI (Bermuda) Ltd. Nasdaq: EXXI

Flagstar Bancorp Inc. NYSE: FBC

Green Plains Renewable Energy Inc. Nasdaq: GPRE

United States Steel Corp. NYSE: X

Vertex Pharmaceuticals Inc. Nasdaq: VRTX

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